Make no mistake. We are witnessing a high-stakes protocol standards
battle play out in real time. And it is just as important as last
century’s battle for the internet’s TCP standard.

Current capacity constraints on the Bitcoin blockchain have brought us to this impasse.

The
Bitcoin protocol, as the dominant value transfer “network effect”
leader, battles against upstart cryptocurrency protocols like Ethereum
and Monero. But it also battles with itself as divergent forces push for
either on-chain scaling or off-chain scaling, hard fork or soft fork, SegWit transaction format or original transaction format.

The
so-called nuclear option is a prolonged, contested hard fork of the
Bitcoin blockchain because it risks splitting the network into two
competing chains, which is to no one’s benefit. Therefore, it should be
reserved as a planned formality or a last resort for extreme situations
rather than a perpetual form of “live” dispute resolution.

With so
much individual and institutional wealth essentially stored on the
Bitcoin blockchain, it can be extremely disconcerting when others try to
“fork” around with your money. Chronic forking is not synonymous with
wealth management and prudent capital accumulation, which require
stability and predictability. Importantly, smart contracts and
non-monetary applications will also rely upon relative stability since
the same native digital token also facilitates the proof-of-work
security model.

This article will examine how open-source
governance was designed to work within the Bitcoin protocol and how
users, miners and developers are locked in a symbiotic dance when it
comes to potential forks to the immutable consensus. Solutions will be
proposed and analyzed that maintain the decentralized nature of the
resulting code and the blockchain consensus, while still permitting
sensible protocol upgrades. Governance is not only about the particular
method of change-control management, but also about how the very method
itself is subject to change.

Open-Source Protocols and Bitcoin

Generally
referred to as FOSS, or free and open-source software, this source code
is openly shared so that people are encouraged to use the software and
to voluntarily improve its design, resulting in decreasing software
costs; increasing security and stability, and flexibility over hardware
choice; and better privacy protection.

Open-source governance
models, such as Linux and BitTorrent, are not new and they existed prior
to the emergence of Bitcoin in early 2009; however, they have never
before been so tightly intertwined with money itself. Indeed, as the
largest distributed computing project in the world with self-adjusting
computational power, Bitcoin may be the first crude instance of A.I. on
the internet.

As
a blockchain community grows, it becomes increasingly more difficult
for stakeholders to reach a consensus on changing network rules. This is
by design, and reinforces the original principles of the blockchain’s
creators. To change the rules is to split the network, creating a new
blockchain and a new community. Blockchain networks resist political
governance because they are governed by everyone who [participates] in
them, and by no one in particular.

Murck continues:

Bitcoin’s
ability to resist such populist campaigns demonstrates the success of
the blockchain’s governance structure and shows that the ‘governance
crisis’ is a false narrative.

Of course it’s a
false narrative, and Murck is correct on this point. Bitcoin’s lack of
political governance is Bitcoin’s governance model, and forking is a
natural intended component of that. “Governance” may be the wrong word
for it because we are actually talking about minimizing potential
disruption.

Where Bitcoin differs from other open-source protocols
is that two levels of forking exist. One level forks the open-source
code (code fork), and another level forks the blockchain consensus
(chain fork). Since there can only be one consensus per native digital
token, chain splits are the natural result of this. The only way to
avoid potential chain splits in the future is to restrict the
change-control process to a single implementation, which is not very
safe nor realistic.

Core development teams are a potentially dangerous source of centralization.

When it comes to Bitcoin Core,
the publicly shared code repository hosts the current reference
implementation, and a small group of code committers (or maintainers)
regulate any merges to the code. Even though other projects may be more
open to criticism and newcomers, this general structure reminds me of a
presiding council of elders.

Making hazy claims of a peer-review
process or saying that committers are just passive maintainers merely
creates the facade of decentralized code. The real peer-review process
takes place on multiple community and technical forums, some of which
are not even frequented by the developers and Bitcoin Core committers.

The BIP (Bitcoin
Improvement Proposal) process is sufficient and it’s working for those
who choose to collaborate on Bitcoin Core. Similar to the RFC (Request
for Comments) process at
the IETF, BIP debates about a proposed implementation can provide
technical documentation useful to developers. However, it is not working
for many involved in Bitcoin protocol development due to the advantages
of incumbency and the false appeal to authority with core developers.
If Bitcoin Core no longer maintains the leading reference implementation
for the Bitcoin protocol, it will be 100 percent due to this
intransigence.

Sensitive to the criticisms of glorifying Bitcoin Core, Adam Back of Blockstream recently proposed an option to freeze the base-layer protocol,
but at the moment that will only move all of the politics and
game-playing to what exactly the base-layer freeze should look like. It
is a nice idea for separating the protocol standard from a single
reference implementation and for transitioning the Bitcoin protocol to
an IETF-like structure, although it’s extremely premature for now.

Therefore, by default, that leaves us with several alternative Bitcoin implementations in an environment of continual forking.

Even Satoshi Nakamoto was critical of multiple consensus implementations in 2010:

I
don’t believe a second, compatible implementation of Bitcoin will ever
be a good idea. So much of the design depends on all nodes getting
exactly identical results in lockstep that a second implementation would
be a menace to the network.

“All code that impacts consensus is part of consensus,” Voskuil told Bitcoin Magazine.
“But when part of this code stops the network or does something not
nice, it’s called a bug needing a fix, but that fix is a change to
consensus. Since bugs are consensus, fixes are forks. As such, a single
implementation gives far too much power to its developers. Shutting down
the network while some star chamber works out a new consensus is
downright authoritarian.”

Multiple alternative implementations of the Bitcoin protocol strengthen the network and help to prevent code centralization.

Politics of Blockchain Forking (or How UASF BIP 148 Will Fail)

Contentious
hard forks and soft forks all come down to hashing power. You can
phrase it differently and you can make believe that two-day zero-balance
nodes have a fundamental say in the outcome, but you cannot alter that
basic reality.

A BIP 148 fork
will undoubtedly need mining hash power to succeed or even to result in a
minority chain. However, if Segregated Witness (SegWit) had sufficient
miner support in the first place, the BIP 148 UASF itself would be
unnecessary. So, in that respect, it will now proceed like a game of
chicken waiting to see if miners support the fork attempt.

Mirroring
aspects of mob rule, if the UASF approach works as a way to bring
miners around to adopting SegWit, then the emboldened mob will deploy
the tactic for numerous other protocol upgrades in the future. Consensus
rules should not be easy to change and they should not be able to
change through simple majority rule on nodes, economic or not.
Eventually, these attempts will run headfirst into the wall of Nakamoto consensus.

As far as the network is concerned, it’s like turning off the power to your node.

UASF BIP148 Nodes (1st August 2017)

There
is no room for majority rule in Bitcoin. Those who endorse the UASF
approach and cleverly insert UASF tags in their social media handles are
endorsing majority rule in Bitcoin. They are providing a stage for any
random user group to push their warped agenda via tyranny of the nodes.

The prolific Jimmy Song says that having real skin in the game is what matters:

Let’s
keep “majority rule” antics out of Bitcoin. There is no protocol
condition that activates “if we are all united” and that is a good
thing.

With enough hashing power, the mob-induced UASF BIP 148
will lead to a temporary chain split. However, the probability of a
Bitcoin minority chain surviving for very long is extremely low due to
the lengthy difficulty re-targeting period of 2,016 blocks. Unlike the
Ethereum/Ethereum Classic fork, that is a long time for miners to invest
in a chain of uncertainty.

Responding to a Reddit post for newbies who are scared of losing money around the 1st of August due to UASF, ArmchairCryptologist explains:

Your
advice is sound, but realistically, the most likely scenario is that
the UASF either wins or dies. If it gets less than ~12% of the hashrate,
it will not be able to activate Segwit in time, and it will almost
certainly die. If it gets less than ~20% I also wouldn’t be surprised to
see active interference with orphaning to prevent transactions from
being processed.

If on the other
hand it gets more than ~40% of the hashrate, the chance for a reorg on
the other chain is large enough that most miners will likely jump ship,
and it will almost certainly win. At over ~20% block orphaning attacks
won’t be effective, as it would split the majority chain hashrate and
risk tipping the scale. Which means that the only situation where you
will realistically have two working chains for an extended period is if
you get between ~20% and ~40% of the hashrate for the UASF.

The
collectivist UASF BIP 148 strategy will ultimately fail and that’s a
good thing. It is driven primarily by those with very little at stake
expecting the miners to stake everything by supporting a minority chain.
Pretty soon, you run out of other people’s money. This commenter on Reddit understands:

The
entire premise was that it was very cheap to switch, but very expensive
to stay. That’s when I realized the folly of it all; [it’s] only cheap
because they’re not staking anything. But someone has to stake
something.

And that’s what is going to cause it to fail. That and the lack of replay protection. People like this guy flip it around and genuinely believe the mining problem will
be solved by massively increased value. If they do somehow put enough
pressure on exchanges that list UASF, despite the lack of replay
protection, and if we take his logic a step further, UASFers are going
to be pushing everyone to “buy, buy, buy” UASF and “sell, sell, sell”
Legacy Coin. But without replay protection, they’re going to be
obliterated by a few smart people who realize there are huge gains to be
had.

Alphonse Pace has an excellent paper describing
chain splits and their resolution. He walks us through compatible,
incompatible and semi-compatible hard forks, arguing that users do have
power if they truly reject a soft-fork rule change:

…
users do have power — by invoking an incompatible hard fork. In this
case, users will force the chain to split by introducing a new ruleset
(which may include a proof-of-work change, but does not require one).
This ensures users always have an escape from a miner-imposed ruleset
that they reject. This way, if the economy and users truly reject a soft
fork rule change, they always have the power to break away and reclaim
the rules they wish. It may be inconvenient, but the same is true by any
attack by the miners on users.

The Future of Coordinating Protocol Upgrades

What group determines the big decisions in Bitcoin’s direction? Ilogy doubts that it is the developers:

Theymos
almost completely foresaw what is happening today. Why? Because Theymos
has a deep understanding of Bitcoin and he was able to connect the dots
and recognize that the logic of the system leads inevitably to this
conclusion. Once we add to the equation the fact that restricting
on-chain scaling was always going to be perceived by the ‘generators’ as
something that ‘reduces profit,’ it should be clear that the logic of
the system was intrinsically going to bring us to the point we find
ourselves today.

Years later these two juggernauts
of Bitcoin would find themselves on opposite ends of the debate. But
what is interesting, what they both recognized, was that ultimately big
decisions in Bitcoin’s direction would be determined by the powerful
actors in the space, not by the average user and, more importantly, not
by the developers.

The developer role can be thought of as
proposing a variety of software menu choices for the users, merchants
and miners to accept and run. If a software upgrade or patch is deemed
unacceptable, then developers must go back to work and adjust the BIP
menu offering. Otherwise, mutiny becomes the only option for
dissatisfied miners.

In “Who Controls Bitcoin?” Daniel
Krawisz says that the investors wield the most power, and because of
that, miners follow investors. Therefore, the protocol upgrades likely
to get adopted will be the ones that increase Bitcoin’s value as an
investment, such as anonymity improvements being favored over attempts
at making Bitcoin easier to regulate.

In the future, miner
coordination via a Bitcoin DAO (decentralized autonomous organization)
on the blockchain could be the key to smooth and uneventful forking.
Self-governing ratification would allow diverse stakeholders to
coordinate protocol upgrades on-chain, reducing the likelihood of
software propagation battles that perpetually fork the codebase.

Attorney Adam Vaziri of
Diacle supports a system of DAO voting by Bitcoin miners to remove the
uncertainty around protocol upgrades. He readily admits that he has been
inspired by Tezos and Decred.

Prediction
markets have also been proposed as a method to gauge user and miner
preferences through public forecasting, the theory being that these
prediction markets would yield the fairest overall consensus for
protocol upgrades prior to the actual fork.

The question remains:
Is coin-based voting based on allocated hash power superior to the
informal signaling method utilized today? Are prediction markets or
futures markets a viable method to gauge consensus and determine
critical protocol upgrades?

I’m not optimistic. On-chain voting
and “intent” signaling are both non-binding expressions while prediction
and futures markets can be easily gamed. Therefore, while Tezos and
Decred represent admirable efforts in the quest for complete resilient
decentralization, I do not think Bitcoin protocol upgrades of the future
will be managed in this way.

The Bitcoin ecosystem doesn’t need to achieve a social consensus prior
to making changes to the protocol. What has clearly emerged from the
events of this summer is that Bitcoin has demonstrated an even stronger
degree of immutability.

There is no failure of governance and there is no failure of
the market. The non-authoritarian forces at play here are functioning
exactly as they should. Protocol upgrades in a decentralized environment
are an evolutionary process, and that process has matured to the current six stages of Bitcoin protocol upgrading, with some optional variances for BIP 91:

(b) Informal intent signaling based on miners inserting text into the coinbase for each block mined;

(c) Block
signaling period where miners formally signal a designated “bit”
trigger for BIP lock-in, based on “x” percent over a “y” number of
blocks period;

(d) Block activation period after BIP lock-in,
which sets a secondary period of “x” percent over a “y” number of blocks
for activation;

(e) Primary difficulty adjustment period (2,016 blocks) where “x” percent of miners must signal for the upgrade to lock in;

(f) Secondary difficulty adjustment period (2,016 blocks) required for the protocol upgrade to activate on the network.

Conclusion

This would not be the first fork in Bitcoin and it won’t be the last. If we believe in the power of Nakamoto consensus and probabilistic security, then the secret to uneventful protocol upgrades is smoother and more reliable signaling by miners.

July
has been a tough month for Bitcoin, but it has also been pivotal. Even
though I doubt the probability of success for UASF BIP 148, some may say
that the threat of the reckless UASF on August 1 played a role in the
rapid timeline for SegWit2x/BIP 91, and I agree with that. Game theory
is alive and well in Bitcoin.

The design of Nakamoto consensus
provides the ultimate method for decentralized dispute resolution by
placing that decision with the hashing power and the built-in incentives
against 51 percent attacks. In fact, Tom Harding considers miners to be
the only failsafe in Bitcoin:

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995